SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1995
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Commission File Number 0-15405
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Data Transmission Network Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 47-0669375
----------------------- --------------------------
(State of Incorporation) (I.R.S. Employer ID Number)
9110 West Dodge Road, Suite 200, Omaha, Nebraska 68114
- ------------------------------------------------- ---------
(Address of principal executive office) (Zip Code)
(402) 390-2328
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Number of shares of common stock outstanding as of May 12, 1995...3,296,481.
1
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
BALANCE SHEETS
March 31, 1995 December 31, 1994
-------------- -----------------
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Current Assets
Cash $ 518,656 $ 720,343
Accounts receivable, net of allowance for
doubtful accounts of $220,000 3,495,593 3,297,773
Prepaid expenses 261,772 189,332
Deferred commission expense 731,406 629,925
-------------- --------------
Total Current Assets 5,007,427 4,837,373
Equipment Used By Subscribers, net of accumulated
depreciation of $47,729,389 and $43,710,079 60,577,177 61,449,931
Equipment and Leasehold Improvements, net of
accumulated depreciation of $5,271,935
and $4,729,831 4,920,469 4,666,742
Other Assets 646,965 505,310
-------------- --------------
$ 71,152,038 $ 71,459,356
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 4,049,365 $ 4,493,796
Accrued expenses 1,392,876 1,117,206
Current portion of long-term debt 9,312,500 9,463,541
-------------- --------------
Total Current Liabilities 14,754,741 15,074,543
Long-Term Debt 18,854,166 19,578,124
Subordinated Long-Term Notes, net of unamortized
discount of $575,465 and $595,310 14,424,535 14,404,690
Equipment Deposits 532,418 542,102
Unearned Revenue 10,120,062 9,152,919
Stockholders' Equity
Common stock, par value $.001, authorized
20,000,000 shares, issued 3,375,408 3,375 3,375
Paid-in capital 14,302,689 14,302,689
Retained earnings (deficit) (491,865) (217,501)
Treasury stock, at cost, 81,330 and 83,723 shares (1,348,083) (1,381,585)
-------------- --------------
Total Stockholders' Equity 12,466,116 12,706,978
-------------- --------------
$ 71,152,038 $ 71,459,356
=============== ===============
<FN>
See notes to interim statements.
</FN>
</TABLE>
2
<PAGE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Quarter Ended
Unaudited March 31, 1995 March 31, 1994
- -------------------------------------------------------------------------------------------------------------------
REVENUES
<S> <C> <C>
Subscriptions $ 9,958,463 $ 7,647,261
Additional services 916,040 778,992
Communication services 1,457,257 977,021
Advertising 611,992 492,400
Service initiation fees 673,458 653,097
------------ -----------
13,617,210 10,548,771
EXPENSES
Selling, general and administrative 7,562,538 5,859,695
Sales commissions 1,086,783 737,919
Depreciation 4,365,465 3,388,307
------------ -----------
13,014,786 9,985,921
------------ -----------
OPERATING INCOME 602,424 562,850
Interest expense 1,044,781 516,992
Other income, net 15,385 10,627
------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES (426,972) 56,485
Income tax (benefit) provision (154,000) 20,000
------------ -----------
NET INCOME (LOSS) $ (272,972) $ 36,485
============ ===========
EARNINGS (LOSS) PER SHARE $ (0.08) $ 0.01
============ ===========
Weighted Average Number of Shares
Outstanding 3,292,440 3,401,611
</TABLE>
3
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<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
==============================================================================================================
Quarter Ended
Unaudited March 31, 1995 March 31, 1994
==============================================================================================================
<S> <C> <C>
Cash Flows From Operating Activities
Net income(loss) $ (272,972) $ 36,485
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 4,365,465 3,388,307
Amortization of debt issue costs and discount 32,190 -
Deferred income taxes (154,000) 20,000
Change in assets and liabilities:
Accounts receivable (197,820) 209,527
Prepaid expenses (72,440) (343,877)
Deferred commission expense (101,481) (75,934)
Accounts payable (692,431) 513,006
Accrued expenses 275,670 (218,714)
Equipment deposits (9,684) (10,604)
Unearned revenue 967,143 989,831
------------ -----------
Net Cash Provided By Operating Activities 4,139,640 4,508,027
Cash Flows From Investing Activities
Capital expenditures for equipment
used by subscribers (2,837,756) (8,579,326)
Capital expenditures for equipment
and leasehold improvements (660,682) (647,970)
------------ ------------
Net Cash Used By Investing Activities (3,498,438) (9,227,296)
Cash Flows From Financing Activities
Proceeds from long-term debt 1,500,000 5,000,000
Principal payments on long-term debt (2,375,000) (937,500)
Proceeds from the exercise of stock
options and warrants 32,111 515,032
------------ -----------
Net Cash Provided (Used) By Financing Activities (842,889) 4,577,532
------------ -----------
Net Decrease in Cash (201,687) (141,737)
Cash at Beginning of Period 720,343 648,391
------------ -----------
Cash at End of Period $ 518,656 $ 506,654
============ ===========
<FN>
See notes to interim financial statements.
</FN>
</TABLE>
4
<PAGE>
DATA TRANSMISSION NETWORK CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The information furnished herein relating to interim periods has not
been audited by independent Certified Public Accountants. The interim
financial information in this report reflects any adjustments which
are, in the opinion of management, necessary for a fair statement of
results for the interim periods presented in accordance with generally
accepted accounting principles. All such adjustments are of a normal
recurring nature. The accounting policies followed by the company, and
additional footnotes, are set forth in the audited financial statements
included in the company's 1994 Annual Report, which report was
incorporated by reference in Form 10-K for the fiscal period ended
December 31, 1994.
2. LONG-TERM DEBT AND LOAN AGREEMENTS:
The company has a senior loan agreement with a group of six regional
banks (the "senior loan agreement"). The senior loan agreement, which
expires June 30, 1995 unless extended, provides for a total commitment
of up to $46,400,000 in new borrowings. As of March 31, 1995,
$26,750,000 of the total commitment had been borrowed, with the
remaining $19,650,000 available to the company subject to certain
restrictions as discussed below.
Additional borrowings under the senior loan agreement are available to
the company, so long as at the time of the advance, no default exists
under the senior loan agreement or under the subordinated notes
agreement (see Note 3), and total debt outstanding (including term
notes outstanding but excluding long-term subordinated debt) does not
exceed thirty-six times monthly operating cash flow (as defined). As of
March 31, 1995, based on its current operating cash flow, the company
would be able to borrow all of the $19,650,000 remaining commitment
available.
Substantially all of the company's assets are pledged as collateral
under the senior loan agreement. In addition to the restrictions
mentioned above with respect to advances, total debt outstanding
(excluding long-term subordinated debt) is limited to forty-eight times
monthly operating cash flow or three and one-half times stockholders'
equity (defined to include long-term subordinated debt), whichever is
less. Additionally, total debt outstanding (including subordinated
debt) is limited to sixty times monthly operating cash flow. The
company is also required to maintain total stockholders' equity of at
least $11,500,000, a ratio of quarterly operating cash flow to interest
expense (as defined) of at least 2.0 to 1, and is restricted to paying
no cash dividends in excess of 25% of the prior years net operating
income after taxes.
Interest on the outstanding borrowings (prior to when the borrowings
might be converted to term loans, as discussed below) is at a variable
rate, depending on the ratio of the company's total borrowings
(excluding long-term subordinated debt) to stockholders equity
(including long-term subordinated debt) (the "Ratio"). So long as the
Ratio is below 2.0 to 1, interest is at prime. When the Ratio is
between 2.0 to 1 and 2.49 to 1, the interest rate is at prime plus
1/4%. When the Ratio is between 2.50 to 1 and 2.99 to 1, the interest
rate is at prime plus 3/4%. When the Ratio is at or above 3.0 to 1, the
interest rate is at prime plus 1 1/4%. The prime rate is adjusted
monthly, with the interest rate adjustment (as defined above) changed
quarterly. As of April 1, 1995, the variable rate borrowings
outstanding are accruing interest at the prime rate of 9.0%.
The company has the option to convert the outstanding borrowings to
term loans at any time, payable in forty-eight equal principal
installments, plus interest. Interest on the converted term loans is at
a variable interest rate of 1/4% over the base rate (as determined in
the preceding paragraph) or, at the company's option, may be at a fixed
rate of 3/4% over the base rate. As of March 31, 1995, $1,500,000 of
the total borrowings outstanding had not been converted to term loans.
The remainder of the borrowings were term loans with interest rates
ranging from 6.75% to 9.50%.
The company pays a commitment fee of 1/4% on all unused portion of the
total commitment. Additionally, once the Ratio (as described
previously) reaches 2.50 to 1, the company will be required to pay a
closing fee of 1/2% on all new borrowings made after that point in
time.
5
<PAGE>
3. SUBORDINATED LONG-TERM NOTES:
On June 30, 1994, the company sold to one investor $15,000,000 of its
11.25% subordinated long-term notes in a private placement transaction
(the "subordinated debt"). The subordinated debt is subordinated in
right of payment to all current and future senior debt. Interest on the
subordinated debt is to be paid quarterly, with principal due in five
equal annual installments beginning on June 30, 2000.
The company has the option to prepay the subordinated debt on any date
after June 30, 1997 at a premium beginning at 7.5% of the principal
prepaid, and decreasing by 1.5% per year until June 30, 2002 when no
premium is required. There are also provisions for mandatory prepayment
upon a change in ownership control (as defined), at a premium beginning
at 12.0% of the principal prepaid during the period ended June 30, 1995
and decreasing by 1.5% per year until June 30, 2002 when no premium is
required.
The subordinated debt agreement contains a cross-acceleration clause,
whereby the subordinated debt will become immediately due and payable
upon a payment default on the senior debt outstanding. Other
subordinated debt financial covenants and restrictions are generally
less restrictive than those of the senior loan agreement.
The company also issued a warrant to the investor to purchase 25,000
shares of the company's $.001 par value common stock at $22.17 per
share on or before June 30, 2004. In connection with the issuance of
the warrant to purchase common stock, the company recorded a $635,000
credit to additional payment in capital and a related debt discount,
which represents an estimate of the fair value of the warrant issued.
Expenses of the subordinated debt offering have been capitalized as
deferred debt issuance costs, and will be amortized, along with the
debt discount mentioned in the previous paragraph, over the life of the
subordinated debt using a level-yield method.
4. EARNINGS (LOSS) PER SHARE:
Earnings (loss) per share were calculated based on the weighted
average number of shares outstanding. Outstanding warrants and options
are included in the calculation of net income (loss) per share only
when their impact is dilutive.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues:
Total revenues for the first quarter of 1995 increased 29% over the same
period of 1994. The increase can be attributed to a strong growth in the
subscription, communications and advertising revenues, due primarily to the
11% growth in total subscribers to 84,600, up from 76,500 one year ago. On
a per subscriber per month basis, operating revenue, (subscription,
advertising, additional services, and communication revenues) increased to
$51.82 for the first quarter of 1995 compared to $43.81 for the same period
in 1994.
Subscriptions:
The 11% growth in total subscribers and the continued increase of
higher revenue services in the subscription mix, helped contribute to
the 30% increase in subscription revenue for the first quarter of 1995
compared to 1994.
Communication Services:
The continued growth by DTNergy refiners sending messages and prices
to their wholesalers, resulted in a 49% revenue increase for the first
quarter of 1995 compared to the first quarter of 1994.
Advertising:
The steady growth of subscribers to the color platform in addition to
the added capabilities of the color system continues to attract new
advertisers. The result was a 24% increase in revenues for the first
quarter of 1995 compared to the same period one year ago.
Expenses:
Total expenses for the first quarter of 1995 increased 30% compared to the
first quarter of 1994. This increase was primarily due to an increase in
the expenses related to depreciation on subscriber equipment, increased
overhead from the increasing subscriber base and increased net development
costs.
Selling, General and Administrative:
Selling, general and administrative expenses grew 29% due mainly to
the 11% growth in the subscriber base and the continued investment in
new developmental services. On a per subscriber per month basis, these
costs were $30.28 for the first quarter of 1995, compared to $25.94 one
year ago. As a percentage of revenues, selling, general and
administrative expenses held constant at 56% for both periods.
Sales Commissions:
Steady increases in gross sales and strong revenue growth in the
DTNergy revenue based commissions attributed to the 47% increase in
sales commissions for the first quarter of 1995 over 1994. DTNergy
commissions are based on the level of net revenue generated and not
new sales as in other products.
Depreciation:
Depreciation expense for the first quarter of 1995 increased 29% over
1994 due to the rising subscriber base and with the change in the
percentage mix of the subscribers receiving their services via the more
expensive color graphics databox. As a percentage of revenue,
depreciation expense was steady at 32% for both periods.
Net Developmental Costs:
As defined, "net developmental costs" include, 1) the costs of market
research activities, 2) the expenses of hardware and software
engineering, and 3) the negative operating cash flow (after interest
expense but prior to corporate allocations) of new products. These
costs for the first quarter of 1995, which are included throughout in
the Statement of Operations, were $926,000 compared to $855,000 for the
same period in 1994. Net developmental costs is one measurement tool of
the Company's investment in new products and technology.
Operating Cash Flow:
Operating cash flow (operating income before depreciation expense) grew 26%
for the first quarter of 1995 over 1994. This increase can be attributed to
more subscribers utilizing the higher margin services and also to the
growing subscriber base. Operating cash flow is one of three key components
management uses to measure the Company's success.
7
<PAGE>
Interest Expense:
The interest expense increase for the first quarter of 1995 over 1994 was
due mainly to higher borrowing requirements needed to fund purchases of
equipment used by subscribers, a 3% rise in the prime rate that drives the
Company's revolving variable rate debt and the addition of the subordinated
debt obtained late in the second quarter of 1994.
Income Tax (Benefit) Provision:
The Company's effective income tax rate was 36% for the first quarter of
1995 compared to 35% one year ago.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Due to the nature of the Company's business, the majority of it's assets
are invested in equipment used by it's subscribers. As a result, the
Company does not have a significant amount of liquid assets.
The Company's primary commitment for capital expenditures is for equipment
used by it's subscribers. During the first quarter of 1995, the Company
purchased $2,838,000 of this equipment compared to $8,579,000 in 1994. The
decrease in purchases was mainly the result of reducing inventory levels
that had been built up by year end. These purchases were financed through
cash flow from operations and borrowings under the revolving senior loan
agreement.
During the first quarter of 1995, net cash provided by operating activities
decreased mainly due to the loss before taxes for the reasons previously
mentioned.
The Company expects to satisfy operating expenses and debt repayment
requirements with internally generated cash flows and the available
borrowings under the current senior loan agreement. During the first
quarter of 1995, the Company borrowed an additional $1,500,000 from the
available credit line.
Stockholders equity decreased to $12,466,116 at March 31, 1995, due to the
first quarter net loss, which was offset slightly by the issuance of
treasury stock upon the exercise of options outstanding to purchase common
stock.
8
<PAGE>
FORM 10-Q
DATA TRANSMISSION NETWORK CORPORATION
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
(a) Date of Annual Meeting of Stockholders - April 26, 1995.
(b) Directors Elected - Roger R. Brodersen, Robert S. Herman,
David K. Karnes, J. Michael Parks, Jay E. Ricks, Greg T. Sloma
and Roger W. Wallace.
(c) Other Matters Voted Upon
- Proposal to amend the Company's Non-Employee Directors
Stock Option Plan, 2,700,301 votes for, 54,887 votes
against, 14,000 broker non-votes and 19,196 votes
abstained.
- Ratification of the appointment of Deloitte and Touche
LLP as independent auditors for 1995, 2,770,192 votes
for, 8,635 votes against and 9,557 votes abstained.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits - 11 - Statement re computation of per share earnings.
(b) Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on it's behalf by the
undersigned thereunto duly authorized.
DATA TRANSMISSION NETWORK CORPORATION
By /s/ Roger R. Brodersen
----------------------------
Roger R. Brodersen
Chairman, President and CEO
By /s/ Greg T. Sloma
------------------------------
Greg T. Sloma
Executive Vice President and
Chief Operating Officer
By /s/ Brian L. Larson
------------------------------
Brian L. Larson
Chief Financial Officer,
Secretary and Treasurer
Dated this 12th day of May, 1995.
9
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<TABLE>
<CAPTION>
Exhibit 11
===============================================================================================
COMPUTATION OF NET INCOME PER SHARE
===============================================================================================
Quarter Ended
March 31, 1995 March 31, 1994
===============================================================================================
PRIMARY
Computation of income per common
and common equivalent share:
<S> <C> <C>
Net income (loss) $(272,972) $ 36,485
========== ==========
Average shares outstanding 3,292,440 3,224,478
Add shares applicable to stock
options & warrants (1) - 167,679
Add shares applicable to stock
options & warrants prior to
conversion, using average market
price prior to conversion (1) - 9,454
Total shares 3,292,440 3,401,611
=========== ==========
Per common share:
Net income (loss) (1) $ (0.08) $ 0.01
=========== ==========
<FN>
(1) Shares applicable to warrants and stock options are antidilutive for the
quarter ended March 31, 1995, and thus, are excluded from the calculation of net
loss per common share.
</FN>
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11-page 2
===============================================================================================
COMPUTATION OF NET INCOME PER SHARE
=============================================================================================================
Quarter Ended
March 31, 1995 March 31, 1994
=============================================================================================================
FULLY DILUTED
Computation of income per common
and common equivalent share:
<S> <C> <C>
Net income (loss) $(272,972) $ 36,485
========== ==========
Average shares outstanding 3,292,440 3,224,478
Add shares applicable to stock
options & warrants (1) - 167,679
Add shares applicable to stock
options & warrants prior to
conversion, using average market
price prior to conversion (1) - 9,576
Total shares 3,292,440 3,401,733
=========== ==========
Per common share:
Net income (loss) (1) $ (0.08) $ 0.01
=========== ==========
<FN>
(1) Shares applicable to warrants and stock options are antidilutive for the
quarter ended March 31, 1995, and thus, are excluded from the calculation of net
loss per common share.
</FN>
</TABLE>
11
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 518,656
<SECURITIES> 0
<RECEIVABLES> 3,715,593
<ALLOWANCES> 220,000
<INVENTORY> 0
<CURRENT-ASSETS> 5,007,427
<PP&E> 118,498,970
<DEPRECIATION> 53,001,324
<TOTAL-ASSETS> 71,152,038
<CURRENT-LIABILITIES> 14,754,741
<BONDS> 33,278,701
<COMMON> 3,375
0
0
<OTHER-SE> 12,462,741
<TOTAL-LIABILITY-AND-EQUITY> 71,152,038
<SALES> 13,617,210
<TOTAL-REVENUES> 13,617,210
<CGS> 0
<TOTAL-COSTS> 13,014,786
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,044,781
<INCOME-PRETAX> (426,972)
<INCOME-TAX> (154,000)
<INCOME-CONTINUING> (272,972)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (272,972)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
